accounting.docx - Throughout this section we'll be looking...

Throughout this section, we'll be looking at the business events and
transactions that happen to Paul's Guitar Shop, Inc. over the course of its
first year in business. Let's take a look at how Paul starts his accounting cycle
below.
 Journal Entries
 T-Accounts
 Unadjusted Trial Balance
 Adjusting Entries
 Adjusted Trial Balance
 Financial Statements
 Accounting Worksheet
 Closing Entries
 Income Summary Account
 Post Closing Trial Balance
 Reversing Entries
Journal Entries
Journal entries are the first step in the accounting cycle and are used to
record all business transactions and events in the accounting system. As
business events occur throughout the accounting period, journal entries are
recorded in the general journal to show how the event changed in the
accounting equation. For example, when the company spends cash to
purchase a new vehicle, the cash account is decreased or credited and the
vehicle account is increased or debited.
Identify Transactions
There are generally three steps to making a journal entry. First, the business
transaction has to be identified. Obviously, if you don't know a transaction
occurred, you can't record one. Using our vehicle example above, you must
identify what transaction took place. In this case, the company purchased a
vehicle. This means a new asset must be added to the accounting equation.

Analyze Transactions
After an event is identified to have an economic impact on the accounting
equation, the business event must be analyzed to see how the transaction
changed the accounting equation. When the company purchased the vehicle,
it spent cash and received a vehicle. Both of these accounts are asset
accounts, so the overall accounting equation didn't change. Total assets
increased and decreased by the same amount, but an economic transaction
still took place because the cash was essentially transferred into a vehicle.
Journalizing Transactions
After the business event is identified and analyzed, it can be recorded.
Journal entries use debits and credits to record the changes of the
accounting equation in the general journal. Traditional journal entry format
dictates that debited accounts are listed before credited accounts. Each
journal entry is also accompanied by the transaction date, title, and
description of the event. Here is an example of how the vehicle purchase
would be recorded.
Since there are so many different types of business transactions,
accountants usually categorize them and record them in separate journal to
help keep track of business events. For instance, cash was used to purchase
this vehicle, so this transaction would most likely be recorded in the cash
disbursements journal. There are numerous other journals like the sales
journal, purchases journal, and accounts receivable journal.